Question

What’s a firm’s market value? What are some factors driving a firm’s market value?

Answer 1

The market value of any asset is the value that it would fetch in an open market when transacted at arm's length. Similarly. The market value of a firm refers to the combined value that all shares of a company would fetch in the market.

Luckily, a lot of businesses are listed on stock exchanges and therefore, the market value of shares is readily available in the form of prices they are currently being traded at on the stock exchange. Mathematically speaking, the market value of a firm can be defined as below:

Market value (also known as market capitalisation)= (Total number of shares outstanding*market price per share)

Factors that drive a firm's market value:-

The factors that drive a firm's market value can be primarily divided into the following categories:

• Macro factors: These are the factors that are not firm specific but rather economy wide or industry wide factors that directly or indirectly impact the business of a firm and hence its market value. These factors are out of control of any organisation and depending on the specific situation, a factor may impact an entire industry or even the entire economy. Some examples of macro factors are as below:
  • Financial crisis (e.g. 2008 financial crisis)
  • Interest rates
  • Government policies and regulations such as imports duties, export regulations, license regulations, tax rates,
  • Prevailing economic trends
  • Industry specific regulations
  • Laws such as patent laws, union laws, etc
• Firm specific factors: These are the factors that are firm specific and directly impact the business of firm and hence its market value. These factors are generally under the influence of the firm and the way the firm handles these factors influence not only the business of the firm but it's it's competitors and hence the entire industry. To put things in context, there could be innumerable micro factors that play a role in success or failure of a business and all those factors come under this category. However, let's look at some major examples for our purpose:
  • Availability of funds from investors
  • Performance of senior management
  • Firm's business strategies
  • Ability to generate durable competitive advantages
  • Patents held by the firm
  • Competitive scenario in the industry (as it's also impacted by the firm)
  • Cost of capital
  • Ability to attract talent
  • Brand value
  • Customer relationships
  • Learning curves

As seen above, there could be various factors that could impact the business of a firm and hence its market value. A business must always try to diversify the micro risk that it can influence and make strategic provisions for any unforseen risks that could arise due to macro factors